Friday, October 23, 2015

If you want a quick and dirty guide to whether an incumbent political party will retain control of the White House in a Presidential election, simply knowing whether the economy will be in expansion or recession in the 3rd or 4th quarter of the election year gives you the correct answer more than 2/3's of the time.

The NBER maintains the official list of US recessions going back over 160 years to 1854. During that time, there have been 33 recessions, and 40 Presidential elections. Eleven of those Presidential elections have taken place during a recession (measured by the 3rd or 4th Quarter of the election year).

In only 3 cases has the incumbent party been successful maintaining control of the White House (and in one of those cases, the incumbent party's candidate lost the popular vote, but won in the Electoral College). In the other 8 cases, the incumbent party lost, including at least 3 of the biggest political turning points in US history (1860, 1932, 1980).

Similarly, of the 29 times the economy has been expanding during the 3rd and 4th Quarter of an election year, the incumbent party has retained control of the White House nearly 3/4 of the time.

Here's the complete list:

Recession, incumbent party maintains control (3 elections):

1876 - Hayes (R, succeeds R Grant)*

1900 - McKinley (R re-elected)

1948 - Truman (D, elected)**

Recession, incumbent party loses control (8 elections):

1860 - Lincoln (R, replaces D Buchanan)

1884 - Cleveland (D, replaces R Arthur)

1896 - McKinley (R, replaces D Cleveland)

1920 - Harding (R, replaces D Wilson)

1932 - FDR (D, replaces R Hoover)

1960 - Kennedy (D, replaces R Eisenhower)

1980 - Reagan (R, replaces D Carter)

2008 - Obama (D, replaces R Bush)

Economic expansion, incumbent party retains control (21 elections):

1856 (D Buchanan succeeds D Pierce)

1864 (R Lincoln re-elected)

1868 (R Grant replaces R Johnson)

1872 (R Grant re-elected)

1880 (R Garfield succeeds R Hayes)

1904 (R Teddy Roosevelt elected)**

1908 (R Taft succeeds R Teddy Roosevelt)

1916 (D Wilson re-elected)

1924 (R Coolidge elected)**

1928 (R Hoover succeeds R Coolidge)

1936 (D FDR re-elected)

1940 (D FDR re-elected)

1944 (D FDR re-elected)

1956 (R Eisenhower re-elected)

1964 (D Johnson elected)**

1972 (R Nixon re-elected)

1984 (R Reagan re-elected)

1988 (R Bush succeeds R Reagan)

1992 (D Clinton re-elected)

2004 (R GW Bush re-elected)

2012 (D Obama re-elected)

Economic expansion, incumbent party loses (8 elections):

1888 (R Harrison replaces D Cleveland)

1892 (D Cleveland replaces R Harrison)

1912 (D Wilson replaces R Taft)

1952 (R Eisenhower replaces D Truman)

1968 (R Nixon replaces D Johnson)

1976 (D Carter replaces R Ford)

1992 (D Clinton succeeds R Bush)

2000 (R Bush succeeds D Clinton)*

*lost popular vote; decided in Electoral College

**predecessor of same party died in office

Bottom line: while an ongoing recession at the time of the election does not always mean that the incumbent party will lose control of the White House, it spells DOOM by better than a 2:1 ratio.

Similarly, while an ongoing economic expansion at the time of the election does not guarantee that the incumbent party will retain control of the White House, it has been a meant success by better than a 2:1 ratio.UPDATE: If we go by popular vote rather than Electoral College victory, then the elections of 1876 and 2000 fall into line, meaning that the popular vote in fully 80% of all Presidential elections correlates positively with whether or not the economy has been in recession or not at the time of the election.By the end of next week, all but one of the long leading indicators, designed to tell us 1+ year out whether the economy will be expanding or in recession, will have been reported for Q3, meaning that we should have visibility through the 3rd Quarter of next year.

Tuesday, October 20, 2015

Tom Schaller made a convincing case in "Whistling Past Dixie" that in the South, moral and social issues are threshold issues, writing that there, Democrats "flunk the litmus test:"

Why do Democrats struggle so mightily in the South? .... The short answer [ ] is that social and cultural isues tend to trump economic considerations for many voters in the South....

In other words, only candidates whose views on those issues are acceptable then get their economic positions considered. In other words, a socially liberal Democrat with historically populist economic positions stands no chance in the Old South.

I think Schaller's analysis is more universally true than he considered, and is equally applicable to the left. For example, in 2012 Huckabee had very populist anti-Wall Street positions. Was there the slightest feeling on the left that he might be an acceptable GOP candidate? Hell no! Because of his position on social issues. In other words, I think Dixie only stands out because its moral "screen" is half a standard deviation to the right of that of the relatively conservative Midwest or Mountain states.

In the last few weeks, we have had two more demonstrations of this "gatekeeper" role of social and moral issues. Jim Webb, an economic populist with RW views on a number of social and foreign policy issues, got zero traction as a democrat and is considering running as an independent.

More importantly, look at what just happened in Canada. The NDP was leading until its leader made comments about the Muslim face covering, the naqib. At that point their poll numbers collapsed and their voters turned to the Liberals as an acceptable second choice even though apparently the Liberals are within the "neoliberal" economic mainstream.

BTW, historically this same tension has played out in countries like Mexico and in Europe, where RW parties come to power by highlighting socially unacceptable positions held by economically populist LW parties.

The bottom line is, there isn't just a trade-off between social and economic issues. Rather, voters will vote their pocketbook, but they will only vote their pocketbook from among those candidates who hold acceptable positions on social and moral issues.

Monday, October 19, 2015

As I previously pointed out, Powerline has a long history of being 100% wrong on the economy. From the "Fed is printing money so inflation will spike" garbage, to "the CRA caused the housing crisis" to the latest "Dodd Frank is crushing small business lending" meme, these guys have not been able to get one thing right.

Steven Hayward continues that trend. On October 8th, he argued that interest rates would spike because China was selling treasuries. He concluded:

The Fed may have to raise interest rates whether it wants to or not in order to get more suckers buyers for our bonds.

The buying has been crucial in keeping a lid on America’s financing
costs as China -- the largest foreign creditor with about $1.4 trillion
of U.S. government debt -- pares its stake for the first time since at
least 2001. Yields on benchmark Treasuries have surprised almost
everyone by falling this year, dipping below 2 percent last week.

It’s not the scenario that doomsayers predicted would leave the U.S. vulnerable
to China’s whims. But the fact that Americans are pouring into
Treasuries may point to a deeper concern: the world’s largest economy,
plagued by lackluster wage growth and almost no inflation, just isn’t strong enough for the Federal Reserve to raise interest rates.

“As you develop a more pessimistic view on global growth, inflation, and rates, asset managers are going to buy Treasuries in that environment,” said Brandon Swensen, the co-head of U.S. fixed-income at RBC Global Asset Management, which oversees $35 billion.

If anything, Powerline continues their long and solid history of being a great contrarian indicator. Do the opposite of what they project and you'll make out like a bandit.

Sunday, October 18, 2015

This week housing permits will be reported. That will give us most of the long leading indicators for Q3, and that means we can begin meaningfully talk about whether things like GDP, employment, and personal income will still be positive in Q3 2016. Since these are some of the better-rated economic indicators found by Nate Silver as predictive of Presidential elections, it also means we can begin to talk meaningfully about whether the incumbent Democrats or the opposition Republicans are likely to win the 2016 election.

But this is a good time to note that, to paraphrase Bill Clinton's famous slogan, "it's not *just* the economy, stupid!" There are social and moral issues, and unless you think the Vietnam War, the Civil Rights Acts, Watergate, Willie Horton, the Lewinsky affair, and the Swiftboating of Kerry were irrelevant, I submit that they have had an effect on election outcomes.

If the sole determinant of an election were whether or not the economy is in a recession in the 3rd or 4th quarter of the election year, then Dewey would have won in 1948, Stevenson in 1952, Humphrey in 1968, Ford in 1976, Bush in 1992, and Gore in 2000.

Even adjusting to trend, almost all economic indicators weren't just positive, but *very* positive in 1968 and 2000. Humphrey and Gore shouldn't have just won, but won in a landslide.

So clearly the economy isn't the sole determinant of winning the Presidential election.

Probably the best analysis of the relative import of social vs. economic issues was contained in Thomas Schaller's "Whistling Past Dixie," the tome which forecast Obama's winning electoral coalition. Schaller wrote that, in Dixie, social issues are gatekeepers. Candidates' views on the economy aren't even considered until they pass through a social "screen" of acceptability. Schaller was writing from the Democratic point of view, but I suspect a similar dynamic plays out on the left. If there were a candidate with Bernie Sanders' economic populist views, but right wing views on abortion, gun control, and gay rights, would progressives really be interested? In 2012 GOP Gov. Mike Huckabee of Arkansas was pretty much that, and I recall zero interest in his candidacy by the left.

The bottom line is, I believe voters do in fact vote their pocketbooks, among those candidates whose views on moral or social issues they find basically acceptable. Thus much effort is expended in campaigns to make the opposing candidate simply morally unacceptable.

Prof. Douglas Hibbs' "Bread and Peace" model takes at least one moral issue - war - and integrates it into his analysis, which makes use of the number of military casualties during a President's term. This method does at least partially explain Humphrey's loss, and subtracted at least a little from Gore's total (Serbia) and George W. Bush's and McCain's (Iraq and Afphanistan).

It is well beyond my competence to try to incorporate other "moral issue" into an election model. It is simply well worth it to remember that such issues are important. If the economy is going well, the opposition will focus on them. If the economy is doing poorly, there is barely a need.

A second limitation of the model can be filed under "what have you done for me lately?" There is a line of thought that, after two terms of one party, there is an increase in voters restless for change, regardless of what the economy is like. That certainly helps explain 1968 and 2000, but there aren't enough data points to enable reliable comparison.

That being said, it is certainly interesting that the concept of parties only lasting in power typically through two presidential terms is a relatively recent phenomenon. In the long arc of US history, it is fair to consider the US as being a rising economic power from its inception through the 1940s, at its apogee in the 1950s and 1960s, and relatively speaking at least being a waning power from at least 1974 on. Now let's compare against the frequency with which control of the White House shifted from 1800 to 1952:

Democratic-Republicans: 1800-28 (28 years)

Jacksonian Democrats: 1828-40 (12 years)

1840-60: multiple changes of power

1860-1884: Republicans (24 years)

1884-96: 3 changes of power

1896-1912: Republicans (16 years)

1912-20: Democrats

1920-32 Republicans (12 years)

1932-52: Democrats: (20 years)

Since 1952, however, control of the White House has changed every 8 years with the exception of 1976-92, a single Democratic term followed by 12 years of GOP control.

While the US economy was in its ascendancy, voters were willing to trust a single governing party with control for long periods of time, switching when economic progress stalled. Only the 20 years of turmoil leading up to the Civil War stand out as different. Since the US economy reached its relative apogee, voters have behaved as if they felt the parties had no solution to the relative decline in their fortunes.

Although we probably can't measure it in any accurate statistical way, over the long term US voters are behaving as we would expect them to if they were voting on the waxing and waning of their economic well-being.

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